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Friday, 6 November 2015

The merger of
SEBI and FMC is an epic event in the history of Indian commodity market with
which the regulation of the commodity derivatives market shifts to SEBI under
the Securities Contracts Regulation Act (SCRA), 1956. SCRA is a stronger law,
and gives more powers to SEBI than the Forward Contracts Regulation Act (FCRA)
offered to FMC.

Prior, to the
merger The FMC had been regulating the commodities markets since 1953, but it
was seen to have lacked the muscle to tame the alleged irregularities in this
market segment. It was a low-profile regulator and was headed by a government
appointee and it conducts its activities through plan and non-plan funds from
budget grants and its staff recruitment system was dependent on what the
government plans. In the absence of a powerful regulator, the commodities
market has been more prone to illegal activities like ‘DABBA TRADING’ (where a stockbroker executes a customer’s trade
done through his local books, but not reflecting at the exchange, with the hope
of making some gains at a future date) compared to the better-regulated stock
market. With the official merger on 28th September 2015, one can now
expect a stronger regulation as SEBI is an autonomous body with wide, sweeping
powers to control and develop capital markets, mutual funds, exchanges and
intermediaries. Apart from the wiliness of department of consumer affairs (DCA),
Government of India, FMC had also taken up several measures to bridge the
regulatory gap between securities and commodities markets which includes
tightening the shareholding norms of commodity exchanges, improving corporate
governance and revamping risk management, warehousing and investor protection
norms.

FMC merger
with SEBI has now opened up new challenges for the commodity regulators. The
merger is aimed at streamlining the regulations and curb wild speculations in
the commodities market, while facilitating further growth there. Expectations
from the merger are high from market participants, investors and the government
itself. Accordingly, the SEBI from day one is on the move. It has created a
separate Commodity Cell and has set up new departments for regulation of
commodities derivatives market. It has formed a Commodity Cell by posting its
senior officials, while two internal departmental committees (one each in
Integrated Surveillance Department and Market Intermediaries Regulation and
Supervision Department). It has also sought help from the Agriculture Ministry
with regard to the data sources for the prices and to improve the methodology
for determination of final settlement price. The major challenge for the SEBI
is the regulation of the new regime is that the underlying commodity
derivatives — the physical commodity — which is not within the regulatory
purview of SEBI. The quality checks and safe-keeping of physical commodities at
warehouses is carried out by an independent agency, the Warehousing Development
and Regulatory Authority (WDRA). A convergence of regulation between SEBI and
WDRA will be required to prevent spot future financial irregularities. The
other major challenge is the launch of new financial products / instruments of
trading which is certainly daunting under present state of commodity market. In
India, future trading in food-related commodities always has an element of
political sensitivity, unlike equity derivatives. But, if new products like
options or index futures in commodities do not come or new participants do not
enter the markets, it will be merely a case of ‘regulatory laziness’ which the
India’s commodities derivatives markets cannot afford at this stage.

Regulatory
expectation for the SEBI is high with much tougher standards as it has
regulated the markets efficiently and effectively for over 25 years, making
Indian Security Market as one of the vibrant markets in world. Strict
guidelines and transparency in functioning of SEBI would also help commodities
market to gain confidence of traders. It has better trained human resources and
management practices that can help SEBI to improve conditions in commodities
exchange. Most of the countries except Japan and US have a same regulator
for commodities and securities, thus our commodity market would be increasing
aligned to the international practices and would enhance the financial
integrity. It will allow introduction of much needed Commodity market reforms
as SEBI has been willing to introduce trading in commodity options and indices
after initial one year of transition which would allow small farmers to sell
their at committed rate at a future date. Under SEBI all commodities will
govern by single strong act i.e. Securities Contract Regulation Act which covers
all aspects and helps to monitor the commodity prices and identify defaulters.
It would streamline the transaction process provide confidence better
opportunities to investor in commodity derivatives. SEBI is in support of
introducing foreign institutional investment in commodity trading, which was
not allowed earlier. This would increase foreign participation and increase
liquidity.

The first
change action in the commodity market is already felt in the market with the
SEBI issuing norms for traders of commodity derivatives exchanges that need to
be complied with. The existing members of commodity derivatives exchanges will
be required to make an application for registration and such existing members
of commodity derivatives exchanges will be required to comply with the
Securities Contract (Regulation) Rules, 1957, within a period of one year from
the date of transfer and vesting of rights and assets of FMC with SEBI -- by
September 28, 2016. For new members, the new regulations will apply from the
beginning. The other changes likely to be brought in the commodity market are that
the SEBI would act against entities violating the Essential Commodities Act, if
they were present in the commodity futures markets. SEBI may look at improving
the physical delivery mechanism and warehouse logistics. The last couple of
years have seen a host of warehousing reforms towards stronger governance and
improved quality standards in exchange-approved warehouses. With the
warehousing sector under the regulation of WDRA, a stronger and synergistic
approach between the two regulators would pave the way for robust market
development. Moreover, with the equity and commodity regulators merging, equity
exchanges can open commodity platforms and vice versa.

The extent of market intervention measure in the
Indian commodity market has its own inbuilt challenges. Most of the commodities
are controlled by government in sense of minimum support prices, stock holding
limits, import and export restrictions even non-agricultural goods like gold ,
oil has government intervention MSP, import-export regulation, invoking
provisions of Essential commodities Act distort market trade and commodity
prices. For smooth processing of transactions SEBI has to ensure the no/lower
government interventions. It needs to expand its infrastructure because
commodities are physical goods. It also needs to develop proper parameters to
ensure there won’t be any troubles while delivering. Price discovery has been a
major issue in commodities trading, and if the SEBI addresses that concern, it
will be a big confidence-booster for participants. SEBI has to focus on how
prices and benchmark rates are fixed in commodity markets and also look at the
possibility of having products like options and futures.